Exchange-traded-funds or ETFs are the fastest-growing segment of the mutual fund industry since 2003. Currently, over 430 ETFs trade on U.S. exchanges with a combined $430 billion under management. But a recent study by The Wall Street Journal paints a sobering picture for investors who churn ETFs.

The global mini-panics on February 27 and again on March 13 resulted in many ETFs trading at lower values than the markets they're supposed to represent. For example, the iShares China FTSE/Xinhua 25 Index or FXI, plunged 9.9% on February 27 even though the benchmark it tracks declined just 2.1% that day. The following day, that same index fell another 3.1% while FXI gained 4.8%.

What this tells investors is that the underlying index the ETF is supposed to represent in China declined far less than the actual ETF in late February. The same disconnect or phenomenon occurred for many other ETFs representing foreign markets, including even U.S. indices. But that's not the case with open-ended funds, which did not suffer the same results on February 27.

Indeed, in many cases an active investor (not a trader) would be better off purchasing an open-ended index fund that trades daily, unlike ETFs, which trade throughout regular trading hours on popular exchanges. The reasons why an ETF might disconnect from its underlying index is because of incessant volatility in the market it's tracking coupled with excessive trading by short-term traders like hedge funds.

According to fund-tracker, Morningstar, 89 of the 421 ETFs fell short of their portfolio value by more than 1% on February 27 while 60 of those fell short by more than 2%.

If you're going to trade global markets regularly, be aware of this relationship. And for long-term investors, hedge funds and other short-term traders might inflict more volatility than you bargained for when you purchased that ETF.

In the end, I don't trade and I don't advocate trading. It's never made me any big money. I'll go with Warren Buffett and other value money-managers who buy great companies, sit tight and let compounding do the rest.